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Guarantee of Retirement Income

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The financial realities of our world are changing. More and more people need to rely on their own investments for income during retirement. The assets from which you expect to create a vital stream of income during your retirement face risk from economic turmoil, interest rate uncertainty and market volatility. Markets don’t always go up, and if the first year of our retirement coincides with a market crash, the future doesn’t look so bright.

Stocks plunged nearly 2 percent or more on Monday for their worst day of the year, then on Tuesday The Dow Jones industrial average traded about 90 points higher.  Talk about “Volatility” if you are retired this is like being on a roller coaster ride.  What will ignite the fuse that sets off the next big market crash?

Fortunately, positioning your portfolio to weather the next big downturn doesn’t require that you be able to foresee when the setback will occur or what will instigate it.  One lesson of the 2008 financial crisis has been the importance of having some investment diversification in your retirement portfolio.

If you’re retired, you likely still want to have at least some of your nest egg in stocks to assure that your savings can generate income that will stand up to inflation throughout retirement.  However, the lesson learned is, the more places one invests their retirement assets, the less chance that the overall retirement portfolio will take a big hit when any single asset class slumps.

Many future retirees and present retirees have not taken in consideration the impact that “Uncle Sam” will have on the income from your 401(k), 403(b) or IRA accounts.  Uncle Sam owns up to 30-, 40-, or even nearly 50-percent of your account value.  If you have not started taking distributions yet you probably don’t realize the impact this will have on your actual retirement income.

Whether you like it or not, if you have a traditional IRA or 401(k), when you turn age 70 ½ you will have to start taking money out and pay taxes on that amount annually. Think of it as the IRS gently tapping you on the shoulder.  Required Minimum Distributions, (RMD) is the amount of money Uncle Sam requires you to withdraw each year from your IRA and 401k accounts once you reach age 70-1/2. The IRS makes you take this money out of your IRA and 401k accounts so it can tax that money.

In July, 2014, the Treasury Department relaxed the RMD rules a bit, reflecting the government’s desire to encourage you to prepare financially for your retirement.  The new rules allow you to buy a longevity annuity with your 401(k) or IRA money and not worry about having to include the value of that IRA annuity in your RMD calculations from age 70-1/2 up to age 85.  By investing in the QLAC you essentially postpone paying income tax on some of your IRA money.

Annuities should be in place for lifetime income, lifestyle, and a worry free retirement that doesn’t involve the stock market.  Annuities contractually solve for only four things: Principal protection, Income for life, Legacy, and Long-term care. The acronym you can use to remember this is P.I.L.L.

Most retirees prefer to continue to receive a secure income for the rest of their lives.  Start taking some of the risk off the table and transferring that risk to an insurance company to provide the needed income right now or at a specific time down the road. It really comes down to lifetime income now or lifetime income later.

When you add up your pension (if you are so fortunate), Social Security payments, and other investment income, there might be a gap in the amount of guaranteed income required that needs to be filled. Annuities are the only strategy that can provide a lifetime income stream that you and your wife can never outlive.

A QLAC is a new breed of longevity annuity (also known as deferred income annuity). You set up a QLAC by transferring money from any of your existing IRA or 401k accounts to an insurance company annuity. Your QLAC is designed to pay you a steady monthly income later in life.  Income options can be single or joint life, either life income or life income with cash refund.

This is an annuity in which you pay a lump sum premium to an insurance company and then at a future date which you specify today, you begin receiving a guaranteed monthly payout amount that continues for as long as you (or your spouse) are alive.

The beauty of the longevity annuity is that the insurance company tells you today exactly how much income you will begin receiving in the future. There is no stock market or interest rate risk. The future income amount that’s quoted is guaranteed!

With a longevity annuity you get income security that starts in your old age and at an attractive price. Financial planners estimate that if you own a longevity annuity you can increase the amount you withdraw from your savings in the early years of retirement by as much as 30% because of the reassurance in knowing your income in later retirement is guaranteed by the annuity.

QLACs can also be used in more complicated annuity and financial planning strategies that are based on a concept called laddering in which you space out the maturity dates or dates on which income becomes available. The goal of these strategies is to diversify your portfolio and minimize interest rate risk.

With staggered maturity dates that may stretch across years or decades, you can also plan for times when you anticipate needing more money such as for increased care or even to fund a purchase such as a retirement home.

Another advantage is knowing you have the income security from your QLAC which doesn’t have exposure to stock market or interest rate risks might make you feel more comfortable with being more aggressive with your other investments.

Annuities can be useful in financing retirement.  Your retirement income plan is probably the most important investment decision you’ll make in your life.  Thanks to advances in healthcare, retirees are living longer than ever – sometimes stretching their retirement out 20 years or more.

Living longer, healthier lives is certainly an exciting proposition, but ensuring that your retirement savings will last 20 to 30 years, and possibly longer, is the challenge. Annuities are one of the only guarantees that you can get in life.

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Wednesday, July 1st, 2015 Wealth Management Comments Off

Managing Retirement Risks

Without the traditional safety net of a pension that will send you a check until you die, many workers nowadays are having to play the ultimate betting game: We’re living longer. And even if we’ve saved for our retirement, will we have enough?  There’s definitely a delicate balance between spending and saving in retirement, especially as more and more people seem to be reaching their 90s.

How do you manage your money so you can enjoy it as much as possible while you’re alive but not spend it all before the grim reaper comes? They cannot afford to take risks with their money, even if the investments pay higher income.  The problem is that anything that is risk-free is going to be paying around the cash rate and that is the reality.  Low interest rates and inflation are the dual enemies of retirees.

The first step is to add up everything that you have in terms of investments to make sure it is enough to cover your monthly bills. You need to estimate how much money you will have coming in from Social Security, pensions, 4 percent annual withdrawals from your retirement savings accounts and any other retirement income you will have.

Successful retirement planning involves more than simply covering your monthly bills. Consider how a variety of scenarios, such as a significant decline in your investments, a nursing home stay or living until age 100, will impact your cash flow, and what you would do to cope with each situation.  People should look at their income needs during retirement, subtract from that certain sources of income that are coming in the door–pension, Social Security payments, maybe some sort of fixed annuity payments. The amount that is left over, that’s what the portfolio will need to replace.

The Federal Reserve is moving toward its first interest-rate increase since 2006, and the end of record monetary stimulus will rattle the herds of investors who poured cash into risky debt to try and get some yield.  Tremendous amounts of wealth have been accumulated during the past five years.  Much of this wealth is concentrated in the top 1 percent; and most of that wealth is concentrated in the top 1 percent of the 1 percent.  The average investor lags the market because they don’t have an investment process and they buy and sell things on impulse.

Investors might as well get used to the market volatility. Whether you’re looking at stocks, bonds or commodities, asset prices have been swinging a lot more wildly this year.  We’re in the sixth year of a bull market, valuations are at historic highs, and we have uncertainty about the economy and interest rates.  A 10 percent correction in the Dow means an 1,800-point drop.  If they’re uncomfortable with that, now is the time to scale back risk.

Future results are never certain, so individuals that have a higher equity allocation, especially once they are already in retirement, may often find themselves even worse off than if they had kept a more conservative allocation.  While increased equity allocations could help retirees spend more in retirement if markets are good, some investors ignore the associated increase in volatility, therefore introducing sustainability risk to their portfolios. If markets aren’t favorable, increased equity exposure could be catastrophic for retirees’ retirement plans.

Baby boomers are more health-aware than previous generations and more dependent on social insurance due to losses of investments and sometimes entire pensions after the Great Recession.  What should people do if they are looking to build an income portfolio for themselves.  There are really three things to look out for.

  • First, make sure that your income is coming from a diversified source, don’t have all your income eggs in one basket.
  • Secondly, however you are investing your money whether it’s through a platform or through a product, make sure that it is able to actually pay you the income.
  • Thirdly, building a portfolio with a stable income, in a such a low interest rate world as we have today, so many income products that look like they have a high yield have a really big catch and sometimes that could be higher risk, poor liquidity or even bad tax treatment so look out for that.

The bigger concern for retirees is that as markets get volatile, they start making decisions based on their fears and emotions, not on their financial plans. By the way, we see a market crash about every 4 to 6 years. If history repeats itself the next market crash could be right around the corner, because we’re at the end of the market’s typical 4- to 6-year cycle.  It’s really not a question of if the market will crash, it’s just a question of when.

The bottom line is that you want to be protected BEFORE it crashes. Obviously, this also applies to any of your existing IRAs and any other money you have in stocks and mutual funds.

Okay, so where should you put your money? If you want to protect your hard-earned money from loss, you should consider fixed Indexed annuities. Fixed indexed annuities let you take advantage of market gains with none of the downside risk.

With a fixed indexed annuity, your principle is guaranteed by an insurance company against market losses. There is also an annual reset. Every year the interest you earn becomes part of the principle, so the interest that you earn is also guaranteed to be protected from market losses too.

The biggest benefits to fixed index annuities is they give you a reasonable rate of return and you don’t lose money. If you want to be sure that your money will be there waiting for you when you retire, rollover your old 401(k) or 403(b) into a fixed indexed annuity.

An annuity is sort of like a mix between an insurance plan and an investment account.  Simply put: an annuity is a financial product that guarantees income in retirement.  Annuities allow contribution of a set monthly amount, yield guaranteed payments throughout retirement regardless of stock market performance, and are guaranteed not to lose money.

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Thursday, June 25th, 2015 Wealth Management Comments Off

Safe Retirement Income

Americans worry about affording retirement.  Most retirement plans, such as IRAs, 403(b) plans, and 401(k) plans, contain pre-tax income that owners invested without paying income taxes (but not Roth IRAs). All plan owners must begin taking annual withdrawals of pre-tax funds from their retirement plans and paying taxes on the withdrawals by April 1 of the year after they reach age 70 ½. You are required to spend down your principal.  How long will your retirement nest egg last?

One of the challenges for today’s retiree is finding suitable fixed income instruments that pay a decent yield and avoid the roller coaster ride of today’s financial markets.  Investors are already trying to figure out what to do with their rate-sensitive, yield-focused investments.  Every asset class—even cash—has its own vulnerabilities, and could be risky under certain conditions.  If you’re leaving you money in the market, make sure your retirement plans won’t be derailed by the worst case outcome.

Traditionally, investors nearing retirement with a lot of money in equities would move money into bonds. But low interest rates, which can make buying a future stream of income expensive, and the fact that we’re living longer is changing that calculus.  The economy has become like an out-of-control high pressure fire hose, ready to slap anyone down at any moment, and the people who are supposed to be controlling the spigot are turning it up, instead of shutting it off. The net effect is that all of us are getting hosed.

We are in a potential rising-interest-rate environment, and initially this will have a negative impact on bond and equity markets. If interest rates go up, your bond portfolios will drop in value and you will take a loss.  While the stock market has been good to us since 2008, there is no guarantee that this will continue in the future.  We need financial investments that will provide a guaranteed income that we cannot outlive, adequate to cover, at least, basic living expenses.

Most retirees want the certainty of a floor of guaranteed income, and they are particularly concerned about longevity, which bonds don’t really protect against. Another reason for not choosing bonds is that when you self-insure, the uncertainties of the market mean you have to be very conservative in taking withdrawals, and you have to avoid making big mistakes when the market is down.  Pre retirees and post retirees are starting to have concerns about the relatively lofty valuations in the stock market.

The current stock market valuations are in bubble territory. This should not be particularly surprising given the Federal Reserve’s long-term experimental monetary policy that has led Corporate America to pile on ever-increasing debt. Once the economy slows, it will quickly become apparent just how much of a bubble has been created by the current massive expansion in the monetary base, money that found a home in the U.S. stock market.

What has happened to the market since the beginning of 2006?  The peak in October 2007 to the trough in March 2009, the stock market lost 57 percent of its value.  Since then, the S&P 500 has risen from 677 to its current level of around 2080, a gain of 207 percent.  As well, note that the current bull market reached an important milestone in March 2015; it hit its sixth anniversary. At 72 months, this upturn has lasted significantly longer than all but 3 advancing markets since the Great Depression.

The good news is you can avoid a terrible situation for yourself and your spouse by proper planning immediately. You need to make a good portion of your assets your “safe money.” No matter how far the stock market drops, no matter what interest rates do to volatile bond markets, your safe money needs to have a bulletproof vest on. While other investors are on the Titanic, you need to be on a completely different ship, far away in a safe harbor.

The way to get into your safe harbor is through the time-tested financial vehicles called fixed annuities.  An annuity solution can be used in a strategy of handing a 401(k) fund where you save and when you retire you can use a systematic withdrawal strategy or you are even take all your money at once using the “lump sum culture” of 401(k)s and IRAs.

These are savings options guaranteed by insurance companies that offer more than safety if you stick to the fixed variety. Variable annuities are nothing more than mutual funds wrapped in a tax deferred package by an insurance company – they still have risk plus the ownership costs are much higher than just plain mutual funds. Stay away from variable annuities.

Fixed annuities on the other hand come in several varieties: traditional fixed that mirror a bank CD and offer a set interest rate plus no current income taxes on earnings; index-linked which offers the opportunity for a higher rate because the interest rate they pay depends on the movement or growth of a stock/bond market index like the S&P 500 … but if the market nosedives you don’t because the worse you can do is the minimum return guaranteed by the insurance company.

Lastly there is the income annuity which guarantees you a period certain or lifetime income in exchange for depositing with the insurance company all or some of your retirement money.  The income annuity can give you what employers once guaranteed their retiring employees: a lifetime income you can’t outlive – even if you live to be 125.

Agents’ commissions are paid by the insurer; the expense is built into the product. Some indexed annuities include riders, for an extra cost, to guarantee monthly income for life, an attractive feature to those who don’t have an old-fashioned pension plan and worry about outliving their savings. And some also offer long-term-care benefits should the buyer become incapable of independent living.

Don’t be leery of fixed annuities because they are guaranteed by insurance companies because you’ll be dealing with some of the world’s oldest, largest and financially strongest businesses that have weathered wars, economic depressions and failure of governments. These are the same companies that insure your home, car, life, health, business and virtually every valuable you own or risk you face.

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Saturday, June 20th, 2015 Wealth Management Comments Off

Jigsaw Retirement Puzzle Game

Saving enough money to retire comfortably has long been the goal of the American worker as pension plans have disappeared. The financial realities of our world are changing. More and more people need to rely on their own investments for income during retirement. The assets from which you expect to create a vital stream of income during your retirement face risk from economic turmoil, interest rate uncertainty and market volatility.

As employers continue shifting pension responsibilities to workers, a new question has surfaced: Should employees take their pensions as annuities or systematic withdrawals? Workers with defined-contribution (401k) pensions will have to decide this.  There’s not a one-size-fits-all strategy here, of course.  “It’s like a little game of chess or jigsaw puzzle, and you need to ask yourself, ‘What’s the best thing you can do with your money?

An individual who opts for systematic withdrawals must then manage that money. When investing in financial markets, the individual must decide how much risk to take.  Taking withdrawals can sound attractive, and for some they may be better than annuities, but this is a serious decision that requires careful thought, clear planning and an understanding of how markets work.

Many people don’t transition early enough from investing for long-term growth to creating a portfolio more geared toward generating income that will support them throughout retirement. Making such a shift doesn’t mean you should dump stocks wholesale or load up on “income investments.” Rather, it’s mostly a process of refining your stock-bond-annuity mix to be sure it reflects the level of risk you’re comfortable with as you enter retirement.

Failing to go through such a re-assessment could leave you with a stock-heavy portfolio that, in the event of a major market downturn, could significantly reduce the amount of money you can safely draw from your portfolio each year and lower the chances that your savings will last as long as you do.  “Longevity risk”—the possibility that people will live longer than expected, is putting a strain on their own retirement savings

Retirement planning has three steps – accumulation, preservation and distribution. In accumulation stage you invest in different investment products based on your risk profile and time horizon towards retirement. Preservation and distribution stages go parallel to each other and these stages come after getting retired. In these stages the main goal of investor is to preserve the amount accumulated and also keep on getting some income out of it to take care of retirement expenses.

Retirement tends to put a big magnifying glass on your savings. Part of it is that you tend to have more time to focus on your money than you did during your working years. Part of it is that you need to figure out where to draw from—whether it’s which investment or which account—and not just how to invest your savings. And part of it is that you suddenly feel this sense of urgency to make your money last through a combination of restraint and returns.

As most people found out during the bear market and the Great Recession, managing your investments is a lot more complicated than merely picking stocks or mutual funds. The stock market has an empirical rule: interest rates lead stocks. And the current interest rate environment is pointing to a massive decline for the U.S. market.

Consider: The Federal Reserve has taken rates to the lowest level in more than a generation. This has energized stock prices. The Fed has persisted in its directive to “stay the course,” having made no raises in the discount rate for more than seven years. Such monetary policy has no precedent; this is the longest stretch of accommodation by the Fed in the post-World War II era.

An Annuity is a retirement tool for investors who want retirement income certainty.  Annuities can be an effective tool to trigger a lifetime stream of income in retirement.  Generally somewhat better than the commonly used withdrawal rules. “I worry whether the ‘lump-sum’ culture of 401(k) plans and IRAs will lead retirees to a sufficiently structured and prudent approach to lifetime retirement income. It is clear that commercial individual annuities should have a prominent role in retirement-income strategies for many workers.

Utilizing the guaranteed lifetime benefits of the annuities, combined with the flexibility of withdrawals from a diversified investment portfolio, provides a steady income while allowing retirees the flexibility to cover unexpected expenses from health issues or other unforeseen circumstances and goes a long way of solving the jigsaw retirement puzzle.

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Friday, June 12th, 2015 Wealth Management Comments Off

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